Toronto’s Airport Link in Public Hands After Collapse of PPP Deal

For investors interested in infrastructure projects these days, there is apparently a lot of low-hanging fruit to pick. This, at least, is the argument made by Montréal-based contractor and engineering firm SNC-Lavalin, which has pulled out of a years-long commitment to operating Toronto’s planned airport connection train because the regional transportation authority refused to subsidize the service.

The construction of a new two-mile corridor between an existing rail track and the airport was to be fully paid for by government investment. The Canadian federal government pushed a public-private partnership (PPP) deal for the project’s operation in the early 1990s in exchange for a commitment for national funds to back up local money.

According to an SNC-Lavalin spokesman, “When there are so many other infrastructure projects that are proceeding at this time, the banks are not interested in projects without a fixed income stream.” This leaves regional transit agency Metrolinx in charge of the program’s implementation and responsible to pay for operating shortfalls if necessary. Other transportation organizations hoping that assembling a PPP will allow for a transit operation with no public subsidy should put their dreams in check.

The irony of the loss of SNC-Lavalin’s involvement since 2003 through a subsidiary called the Union-Pearson Air Link Group is that it may in reality mean fewer public expenditures than originally foreseen. Metrolinx, which is also pursuing the Toronto region’s ambitious expansion of rapid transit, claims that it can get the project built for a lower cost than SNC-Lavelin had estimated. In addition, if fares are high enough, the operation may well be able to make money, in which case the profits will go to the public sector instead of into the hands of a corporation.

If Metrolinx is indeed able to save money by relying on its own expertise instead of that of an engineering firm, it may be able to transfer some already committed funds to the electrification of the line — a long-sought improvement for residents of the surrounding area, who claim to be choking on diesel fumes. In addition, the transit agency has the opportunity to refine its decision-making about who will use the line; does it want to price the service high, providing premium benefits like downtown baggage check-in? Or is it interested in reducing costs to attract as many riders as possible? Metrolinx will be able to alter the financial structure of the service over the years to adjust to changing conditions, something that would not have been feasible under a long-term fixed PPP.

The public agency has the added benefit of being able to take advantage of its existing facilities to keep up the line; even if it buys new trains, it can store and maintain them in the same buildings used by GO Transit commuter trains. It can take advantage of its already existing team of experts to make sure the tracks stay in order. So there are some significant benefits to exiting from the PPP deal.

In the context of increasing discussions about the role of the private sector in the creation of public infrastructure, Toronto’s example may be worth considering. The refusal of Metrolinx to agree to subsidize the operations of the Airport link rang the death knell for the financing scheme of a project that was supposed to be self-funded thanks to its primary clientele, relatively wealthy air travelers. This, of all transit projects, should be able to make up its operating costs. But the deal evidently was not good enough for SNC-Lavalin.

Lyon’s Rhônexpress program, now under construction in southeastern France, may be the only truly sustainable model for private investment in such an airport line. There, the corporate sponsor contributed some of the construction dollars up front in exchange for an annual public subsidy. This guaranteed contribution from the taxpayers, spread out over a long time period, may be the only way to convince corporations to be involved in a PPP process in the usually profitless transit world. A more open-ended situation, in which it is simply assumed that a private operator will be able to make money over the long-term, does not seem likely to attract much interest.

Given the way governments in Canada run, you can expect this line to be open no sooner than 2020. The project will cost 2.5 times its original budget. Second hand diesel cars from China, Japan, or Europe, built in the 1980s, will be used, with the eventual goal of electrifying the system. The construction process will be hit with bureaucratic SNAFUs, such as Transport Canada not awarding the railway license because those trains have never been used in Canada before, GO Transit refusing to let the airport trains to touch their tracks because the trains don’t meet the literally exact specifications, and the TTC demanding compensation because the train takes away 100 people per day from their subway/bus service.

For airport access, it might be useful to do a PPP with the airport’s primary users. Unlike other private investors, the dominant airlines have a direct interest in the success of an airport link project; if there’s no other option, they may be interested in contributing money based on how much extra profits they expect to get from an easy airport link.

In principle this makes some sense, but in the case of Pearson Airport, it is claimed to have among the highest landing fees of any airport in the world, partly thanks to a huge reconstruction and expansion project and a number of other oddities (e.g. inconsistencies in aviation fuel taxes). So airlines are not looking for more ways to spend money in Toronto.

I also don’t think the rail link would do anything for the airlines – there are already express buses from major hotels, taxis, large on-site parking for the wealthy and nearby off-site parking… I just don’t see air travel getting more profitable through the rail link. There are lots of employees destined to the airport and adjacent industrial areas, but none of them would pay the steep rate for the proposed service, and the route won’t help most of them. I’m not surprised SNC couldn’t make a business case.

Your point is especially true with respect to Toronto. Air Canada is seeing its wealthy business flyers desert to Porter Airlines, which caters to a high end market and is based at the Island Airport and flies to key destinations such as Montreal, Chicago, and NYC. Sponsoring a link to the airport may steal back some customers, but it takes plenty of time, money, and commitment (not to mention the uncertainty of the project being completed). It’s a great idea, but if bureaucratic SNAFUs are so pervasive, your idea will not get off the ground.

Air Canada and Continental (soon to be United) are now planning their own flights to the Island Airport. Those will surely get off the ground long before the airport rail link breaks ground.

The Heathrow Express rail link to London Heathrow airport was entirely financed by the (private) airport operator, as was the rolling stock and electrifcation of the main line. The airport also bears all revenue risk from the service.

It makes far more sense for the airport to invest in the rail link than some random outside company, because some of the benefits fall to the airport rather than than the train operator.

Personally, I forsee a mix of express and all-stop trains along the corridor.

Hmm. Yeah, public-private partnerships make the most sense to me in two cases: First, when the system can actually make money (they can invest money and get more money back). Second, when there’s one primary company or group of companies that benefit from the line (they can invest money and get customers back).

Outside of those cases, I’ve wondered if it would be best to do a sort of public-public partnership, where a public agency is partnered with a non-profit foundation. The public agency would receive funds from government sources and advertisers, while the non-profit would get donations from a mixture of government, corporate, and individual sources. Ideally, the foundation would provide a buffer to the inconsistent flows of funding. Unfortunately, since transit is so expensive, you’d need an extremely robust foundation to provide a big enough buffer — and it could end up leading to deeper funding cuts because of the perception there’s a “safety net” in place.